Venezuelan Bonds Do the Collapse

By Ben Levisohn

It’s been a rough few days for Venezuelan bonds. Since peaking on April 10 ahead of this past weekend’s elections to replace Hugo Chavez as president of that Latin American nation, a 10-year government bond has dropped 5.3% and is down 8.7% since its high on Mar. 5. And now the once popular bonds are also losing their appeal to strategists and investors, as close elections raise questions about the stability of the county.

REUTERS

Venezuela’s bonds were once much loved by investors. With their big coupons and the country’s capacity to pay thanks to hefty oil revenues, many bond managers found them more appealing than those of other high-yielding nations like Ukraine and Argentina.

Nicolas Maduro’s narrow victory has put much of that into doubt.

Barclays, for instance, cut Venezuelan bonds to neutral from overweight, noting that “a weak presidency and high uncertainty are the main outcomes from this election and are the key drivers in our change in stance.” Its strategists also note that “political gridlock can delay the implementation of the economic measures and could accelerate the deterioration of Venezuela’s already fragile fundamentals.” Those risks are compounded by oil’s collapse, which could put Venezuela on “an unsustainable path” if they continue to fall.

JPMorgan’s Ben Ramsey, meanwhile, downgraded Venezuelan debt to market weight yesterday, also citing Maduro’s weakened position and the uncertainty it creates. “Maduro starts his term looking quite weak, with little mandate to adjust policies and difficulty managing internal rivalries,” Ramsey says. “While we think economic pragmatism may still be in the cards as a survival technique, in the near term radicalism may be in store for Maduro to project strength and rally his base.” The reason for not cutting further: Venezuela’s high yields “still compensate for current risks, which do not include default in our view.”

Goldman Sachs added its voice to the uncertainty choir, too. Its strategists note:

Sunday’s election could have added another layer of uncertainty in a country already deeply polarized politically and socially. According to voting results released by the National Electoral Council, with 99.1% of the votes tallied, Nicolas Maduro defeated the opposition candidate, Miranda Governor Henrique Capriles Radonski, by a very tight margin: 50.8% versus 49.1% (i.e., by roughly 230,000 votes). Mr. Capriles did not concede the election and demanded a full recount. We believe a Maduro administration may be politically weaker than previous governments headed by President Chavez. Governability conditions may weaken because Mr. Maduro will likely be challenged by a rapidly deteriorating macro picture and potentially also by challenges to his leadership from within the Chavismo.

In an email sent today, Russ Dallen of Caracas Capital Markets said that this kind of uncertainty was the reason he “went negative” on Venezuela in January, “when it became clear that the Chavistas were not going to play by the rules.” He wrote in the Financial Times today:

The potential for civil strife is high. The beleaguered opposition has suffered nationalisation and rampant crime for years. The economy has been devastated by price controls, inflation and employment rules that make it virtually impossible to sell goods for more than they cost to make, let alone fire anyone, even if employees never show up for work — and many do not.

This would be a purely academic issue if it weren’t for the fact that Venezuelan debt makes up big chunks of pops up emerging-market bond portfolios. It makes up more than 4% of the PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) exchange-traded fund, while the iShares J.P. Morgan USD Emerging Markets BondETF (EMB) has more than 5% in the Latin American nation’s debt. The Fidelity New Markets Income (FNMIX) has gained just 0.2% this year, putting it in the bottom 15% of the category. As of Feb. 28, a Venezuelan bond was its second largest position.

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There are 2 comments

APRIL 16, 2013 1:34 P.M.

bud u. wrote:

Just keep Kerry/Heinze outta here! Let him screw up North Korea or Libya.

MAY 13, 2013 4:54 P.M.

PalmDesertWriter wrote:

The Fed recently announced they will, as long as Unemployment remains above a reported 6.5%, continue to pump $85BB into the U.S. economy - a clear Inflationary policy. That word clearly out, the U.S. dollar is strengthening against other world currencies. Unless the rest of the world is trying to out-Inflate the U.S., which is possible, these two conditions don't make sense to a traditional economic point of view. What am I missing?

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Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. The Barrons.com Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools.